Around Rs1.5trn revenue gap: Govt mulls PL replacement with new tax steps

ISLAMABAD: The government is considering a proposal of Jamaat–e-Islami to gradually reduce the Petroleum Levy (PL) to Rs5–10 per litre and replace around Rs1. 45–1. 50 trillion in annual federal revenue through a combination of new taxes, withdrawal of exemptions, expenditure savings and stronger tax enforcement. The Ministry of Planning has circulated the proposal to all the concerned stakeholders including Ministry of Finance, Federal Board of Revenue (FBR) and State Bank of Pakistan (SBP) for their comments and examination. The proposal notes that PDL collection reached Rs1, 557 billion during FY2025-26 against a target of Rs1, 468 billion, while the FY2026-27 target has been estimated at Rs1, 576 billion. READ MORE: Petroleum levy collection surges to Rs1. 57tr in FY26 According to the document, reducing the levy to a base rate of Rs5–10 per litre over a 12-month period would leave residual PDL revenue of only around Rs96–180 billion. Consequently, replacement measures would need to generate approximately Rs1. 5–1. 6 trillion annually to maintain the existing level of fiscal space. The proposal, however, highlights an important fiscal distinction between PDL and conventional taxation. PDL is classified as non-tax revenue and is retained entirely by the federal government, whereas most replacement taxes collected through the FBR are shared with provinces under the National Finance Commission (NFC) Award. As a result, the document estimates that gross FBR collections would have to exceed the PDL revenue gap by roughly 2. 3 times unless non-tax instruments, levies, surcharges or an NFC-side arrangement are used to ensure that the federal government does not suffer a corresponding revenue loss. Luxury consumption, high-income taxpayers targeted: As part of the proposed replacement strategy, the government is examining higher Federal Excise Duty (FED) and regulatory duties on luxury imports and high-end consumption. The proposal refers to the experience of the 2022 luxury-import restrictions and estimates that a broader luxury basket, combined with FED on first/business-class air travel and luxury vehicles, could realistically generate Rs200–280 billion once fully phased in. The document notes that the existing super tax, which is currently imposed at rates of up to 10 percent, generates approximately Rs150–200 billion. An additional surcharge of 5–7. 5 percentage points on the largest 200–300 corporations and ultra-high-income individuals has been estimated to generate another Rs180–250 billion, assuming limited profit shifting. The sectors expected to bear a significant portion of this burden include banking, exploration and production, fertiliser and cement. Tax exemptions under review: The proposal also identifies withdrawal of tax exemptions as a major source of additional revenue. Total tax expenditure during FY2025-26 has been estimated at around Rs2. 35 trillion, comprising approximately Rs1. 27 trillion in sales tax, Rs580 billion in income tax and Rs500 billion in customs-related exemptions. After ring-fencing exemptions relating to food, health, education and defence, the document estimates that an addressable pool of around Rs1. 2–1. 4 trillion could potentially be available. It estimates that capturing 35–50 percent of this pool over 24 months could generate around Rs450–650 billion. The document places the full potential of tax-expenditure reform at approximately Rs800 billion to Rs1. 2 trillion, although actual collections have historically remained substantially below theoretical potential. Interest-rate cuts proposed as substitute for PDL revenue: Interestingly, the proposal also considers lower interest rates as a source of fiscal space rather than direct tax revenue. It notes that debt servicing during FY2025-26 was around Rs6. 9 trillion, including approximately Rs6 trillion in domestic debt. Since a substantial portion of domestic debt carries floating rates, a 100-basis-point reduction in interest rates could eventually save around Rs350–500 billion annually after Treasury bills and other floating-rate instruments re-price. A 200-basis-point reduction could therefore create estimated fiscal space of around Rs700 billion to Rs1 trillion. The document acknowledges that this is an expenditure saving rather than conventional revenue collection, but argues that it could substitute for PDL revenue in the primary balance, subject to inflation allowing such monetary easing. Agriculture income tax and wealth taxation: The proposal also seeks greater taxation of high-value economic activity, including agriculture income and wealth. Agriculture income taxation is estimated to have potential to generate Rs40–80 billion within 12 months and Rs120–200 billion on an annualised basis over 24 months. Similarly, an effective wealth tax based on a one-percent levy on documented net movable and immovable assets above Rs100 million, together with a capital value tax on foreign assets, has been estimated to generate Rs50–90 billion during the initial period and Rs100–160 billion on an annualised basis within 24 months. The proposal, however, acknowledges that valuation disputes and litigation could constrain first-year collections from wealth taxation. Carbon levy could generate up to Rs200bn: An expanded environmental and carbon levy has also been proposed. The document says the existing climate-support levy of around Rs2. 50 per litre, potentially rising to Rs5 per litre, could generate approximately Rs45–90 billion. It further proposes extending carbon pricing to coal, cement, captive power and large industrial emitters at USD 3–5 per tonne of carbon dioxide. Based on approximately 200 million tonnes of covered emissions, the measure could generate an estimated Rs80–120 billion, taking the total potential annualised yield to around Rs130–200 billion by the 24th month. AI-based tax evasion detection proposed: The proposal places significant emphasis on technology-driven enforcement, particularly data matching across banks, utilities, travel, property and points of sale. It notes that the FBR’s compliance gap is substantial but that enforcement recoveries tend to take time because of litigation. Drawing on international experience, the proposal estimates that data-driven audits could recover around 1. 5–2. 5 percent of the total tax collection base within two years, potentially translating into Rs200–350 billion in annualised collections. The document also proposes restructuring the FBR around a leaner structure and stronger internal accountability. It estimates that reducing leakage in customs and refunds, conservatively recovering 10–20 percent of estimated leakage, could produce Rs50–100 billion, although the gains would largely materialise over time and would also reinforce other tax-enforcement measures. GIS/GPS-based property taxation: Another proposed measure is the use of GIS/GPS technology to identify and classify land and property for taxation. The document points out that urban immovable property tax currently generates less than 0. 1 percent of GDP against an estimated potential of 0. 5–1. 0 percent. Satellite-based reclassification of under-declared commercial and industrial land in major cities could, according to the proposal, generate around Rs30–60 billion initially and Rs80–150 billion on an annualised basis by month 24. However, the document again flags the federal-provincial revenue-sharing issue, as land and property taxation falls within the provincial domain. Retail sector to be brought into tax net: The strategy also calls for bringing the entire retail sector into the tax net on a soft-term basis without exemptions. The proposal estimates that Pakistan has around 3. 5–4 million traders, while well below 15 percent currently file tax returns. It says previous documentation schemes largely failed to generate meaningful revenue, but suggests that a low fixed levy linked to electricity meters covering around 2. 5 million commercial connections, combined with mandatory point-of-sale integration for larger retailers, could potentially generate Rs150–250 billion annually by month 24. The proposal estimates initial revenue of Rs50–100 billion before reaching the higher annualised yield. PDL replacement package: The document’s reconciliation exercise estimates that PDL revenue requiring replacement is in the range of Rs1. 6–1. 7 trillion, while residual PDL revenue after reducing the levy to Rs5–10 per litre would remain around Rs90–180 billion. This leaves a net gap of approximately Rs1. 45–1. 50 trillion to be filled through new measures. The proposed new revenue measures, covering luxury taxation, higher taxation of high-income groups and various base-broadening initiatives, are estimated to generate Rs774 billion to Rs1. 248 trillion. When combined with fiscal savings from a 100–200 basis-point reduction in interest rates, estimated at Rs700 billion to Rs1 trillion, the total fiscal space could reach Rs1. 12–1. 94 trillion within 12 months. By month 24, the estimated fiscal space rises to Rs2. 295–3. 56 trillion, giving the package potential coverage of around 75–130 percent of the net PDL gap at month 12 and 145–225 percent by month 24. The document consequently favours a gradual reduction in PDL rather than its immediate elimination, arguing that the proposed package could cover the fiscal gap by month 24 with some headroom, while coverage during the first year would remain incomplete. IMF and provincial hurdles: The proposal acknowledges significant implementation challenges. Agriculture income tax and land/property taxation are constitutionally provincial subjects. Therefore, the federal government would require either non-tax instruments or an NFC-side arrangement to capture the full fiscal benefit from these measures. Similarly, the interest-rate saving component depends on inflation remaining within the State Bank’s target range and should be treated as fiscal space rather than tax revenue. More importantly, the document notes that under the existing IMF Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) framework, PDL is treated as a committed revenue line. Therefore, any plan to reduce PDL would need to be negotiated with the IMF and accompanied by revenue-neutral measures, preferably front-loaded through the Finance Act. The document also warns that execution risk is particularly high for agriculture taxation, property taxation and retail documentation, given Pakistan’s historical record of collecting only a fraction of the theoretical revenue potential from these areas. It cites agriculture income tax collection of only Rs5. 6 billion against declared potential of more than Rs800 billion and notes repeated failures of retail documentation schemes. Accordingly, the revenue estimates have deliberately assumed only around 10–25 percent of theoretical potential rather than full collection. The Ministry of Planning has sought comments from the relevant ministries and institutions on the enclosed proposal, indicating that the suggested PDL replacement framework is at the examination and consultation stage rather than being an approved government policy. Copyright Business Recorder, 2026

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